Local authorities industry focus – All change

Controversial changes to local government pension schemes are on the cards as the funds’ shortfall tumbles to a staggering £30bn.

These sweeping measures will up retirement ages for civil servants from 60 to 65 and end final salary pensions. All staff directly employed in local government will be affected, along with police support staff, teaching assistants, large numbers of staff in higher and further education, the Environment Agency and the community and voluntary sectors.

But Ian Greenwood, chairman of the West Yorkshire Pension Fund – which serves 120 organisations including five district councils – believes schemes should have the right to opt out of the planned changes.

“We do not feel these changes are necessary in the case of the West Yorkshire fund, because it is one of the best run,” said Councillor Greenwood, Labour leader of Bradford Metropolitan District Council.

“We can cover the existing level of benefit for our pensioners with the present level of contributions. We don’t see why our pensioners should suffer. We shouldn’t be obliged to alter the regulations.

“We have always adopted a prudent view and when the stock market crashed recently the fund was at 107%. It fell to 85% but we have 24 years to turn it around. If the stock market doesn’t recover we will have to gradually increase contributions, but I don’t think it will come to that.”

Another view point is expressed by a spokesman for Essex County Council. “These changes have recognised that people are living longer. They will help the local government pension scheme to continue to meet the needs employers and employees within the bounds of affordability, and continue to provide a competitive pension arrangement,” he says.

Union response

The proposals have caused uproar among unions, who fear some people could see their pensions halved and senior officers pushed out of the public sector.

The government has denied the changes are about saving money – although deficits have trebled in the last three years and the scheme is widely viewed as being too expensive.

Funding levels have fallen from 91% in 2003 to about 75%, according to the Chartered Institute of Public Finance and Accountancy. Unlike private sector schemes, public scheme liabilities do not have to be met at once, allowing them to take a long-term view. But, with the government planning to cap councils’ budgets for the second year running, local authorities will find it difficult to raise council taxes to plug the pension deficits.

The government claims the measures are being introduced to make the pensions’ system fairer, benefiting the lower paid, women who take career breaks, late joiners and early starters. It would allow people to wind down, perhaps working part time later in their career or working longer if they choose, without affecting their pensions.

The government says it aims to develop a “modern, new look pension scheme to better serve the needs of local government, its workforce and taxpayers on an affordable and sustainable basis.”

Under the present scheme, someone who has very high salary increases towards the end of his career scoops the pensions’ pot, the government maintains.

The new regulations will mean workers will not get their full pension until they reach 65 – a move which will save £245m a year, about 2% of the civil service wage bill.

Private sector forerunners

Final salary pension schemes will be replaced with a “career average” plan – a move already implemented by a handful of private sector companies, including Tesco and Nationwide.

Phil Hope, minister for the Office of Deputy Prime Minister says: “Changes already made to the scheme have recognised that people are living longer, working patterns are changing, and that there is a need to deal with the changing ratio of the economically active population to those in retirement.

“Our agenda seeks to meet the social and economic challenges of these demographic changes by encouraging people to work longer, to help stabilise the affordability of pension provision for taxpayers and to provide an attractive and accessible pensions’ framework for all employees and employers. This is a real opportunity to embrace emerging pension policy and develop a flexible and attractive scheme.”

The Employers’ Organisation for local government organised a series of one-day regional seminars throughout England and Wales last month (January) in a bid to allay confusion over the impact of changes to the pension scheme. The organisation’s assistant director (pensions) Terry Edwards said: ÒIt is not just important to communicate the changes, but also to explain why the changes have been necessary.

“One of the main things to get across is that these scheme changes are not for under-funding reasons, but for demographic ones.

“There are four workers for every pensioner today. By 2050 it is predicted there will be only two workers for every pensioner.”

But union officials are concerned about the way in which the changes are being implemented and have warned that the government is facing trouble. They say the proposals have significant implications for the public sector, which employs more than 5 million workers. It is another blow from the government following the revelation of Chancellor Gordon BrownÕs plans to lose more than 100,000 civil servant jobs.

“Members working for local government have never had high pay or city bonuses, but they could look forward to a decent pension – now all that is being taken away,” says Unison general secretary, Dave Prentis. “The proposed changes to public sector pension schemes will mean increased contributions and reduced benefits.

“What really riles me is the breathtaking hypocrisy of MPs who recently voted themselves the best pension scheme in Europe, but say they canÕt afford it for anyone else.

“This is a position Unison cannot accept and will oppose. It will lead to conflict between Unison and the government.

“Our aim is to get talks going with the government at the highest level to protect public sector pension schemes. But make no mistake – we will not sit back and allow them to tear our members’ pensions to shreds. Our pensions are not gold-plated – the average pension for a local government worker is just £3,800 a year.”

Unison, which represents 750,000 members, claims increasing the retirement age to 65 will decrease the value of future scheme membership by around 30%. This, in turn, is likely to make recruitment and retention more difficult, it says. Hard-working public service workers will have to work for an extra five years to receive an unreduced pension, the union argues.

Unison is threatening to call a one-day strike in March unless the government agrees to suspend the April implementation of the proposed changes and honour its commitment to engage in real dialogue with the trade unions concerning public sector scheme reforms.

Local government unions, the GMB, representing 250,000 members, and the T&G have agreed to unite in the campaign to defend pensions and they, too, are threatening strike action. A strike by all public sector workers would cause the government a major headache in the run-up to the general election, expected to be held in May.

In a joint statement, Brian Strutton, GMB national secretary for public services and Peter Allenson, his opposite in the T&G, said: “The government is proposing to fast track local government pension changes ahead of the rest of the public sector. They are uniquely expecting hard-pressed council workers to pay more for massively reduced benefits.

“If the government cuts council pensions any further, the taxpayer will have to pay the cost of a generation of pension paupers.”

The GMB is demanding that instead of being one of more than 30 consultees to the negotiating process, it has the right to negotiate directly with employers over any changes to pension entitlements. It argues that raising the retirement age would lead to health and safety issues for members working in some manual or high stress occupations. These people would be forced to employ the ill health retirement procedure leading to an increase in stress and strain for the member and bureaucracy for the employer, it claims.

Hundreds of public sector workers from across the UK have already descended on Parliament to lobby their local MPs on the changes to the pension scheme. The TUC-organised lobby Protecting Public Sector Pensions drew support from about a dozen affiliated unions. TUC general secretary Brendan Barber, said: “It is generally recognised that public sector workers earn less than people who do their equivalent jobs in the private sector, in return for a more superior pension. Now the government wants to take this away with insufficient time spent exploring any alternative proposals.”

As unions call for more consultation on the local government pension changes, local authorities face additional questions on how separate pensions legislation – in the form of the new Pensions Act, which came into force in November – will further affect their operations.

Designed to restore confidence in occupational pension schemes, the Act is a complex, ground-breaking piece of legislation and includes a Pension Protection Fund (PPF) to compensate members in cases of company insolvency or fraud.

Some 1,000 amendments have been made to it late in the process, often introduced in the House of Lords, so part of it received little scrutiny from MPs.

Private sector companies will be charged a risk levy – minimised for good employers and well-funded schemes – which would compensate pensioners in cases of companies collapsing. But, as 110 sets of regulations have still to be detailed, lawyers are not sure where local authorities stand in relation to the PPF. In the worst scenario they could be categorised with commercial companies, ultimately leaving ratepayers picking up the risk levy tab.

John Hanratty, pensions executive at Pinsent Masons says: “My feeling is that they won’t be lumped together with commercial companies – but they could be. Where there is money there is always the likelihood of fraud.

“A lot of people want to talk to us about the PPF but we have no details. Most lawyers are in a difficult position until the regulations come out.

“The advantage local government schemes have over private schemes is that they can take a long term view. There is a push towards extending local government schemes to contractors working outside, such as those running the councilsÕ waste management schemes.”

Francois Barker, a partner in the pensions practice at Hammonds’ Birmingham office, says the Act could affect the way outsourcing is carried out and who accepts liability should the outside contractor become insolvent. “My feeling is that the protection fund levy will not apply to public sector schemes but that could make it more difficult for outsourcing,” he says. “Who would meet the employers’ liability should the company become insolvent? ÔMoral hazardsÕ clauses in the Act destroy the concept of limited liability.”

With no PPF to fall back on, this could ultimately leave the local authority responsible for making up the shortfall in pensions for outside contractors who have bought into the local government scheme, potentially leaving a huge dent in the pension pot.

“There is a lot of flesh to come out from the Act,” adds Barker. “There is some looseness and we need to keep a watch on it.”

Proposed pension scheme changes

Pension age raised from 60 to 65

85-year rule – where a person could retire on full pension if their age plus the number of years’ service equalled or was greater than 85 years of age – will no longer apply

Minimum age a pension can be paid, other than on ill-health, increased from 50 to 55

Final salary pension schemes will be replaced with one based on “career average”

Increasing contributions from employees, while reducing those from employers. The average contribution will be raised from 6% to 7%.

Contributions will be graded from 2.5% for those earning £5,000 a year or less to 10% for those earning about £80,000